Section 125 Plan Extended Claims Period

What is it: For unused amounts remaining in a Healthcare FSA or a Dependent Care Account under the Section 125 plan as of the end of a grace period or plan year ending in 2020, a Section 125 plan may permit employees to apply those unused amounts to pay or reimburse medical care expenses or dependent care expenses, respectively, incurred through December 31, 2020.

How does it work: It works similar to the grace period, even though it is separate. Employees have additional time to “incur” expenses in order to use any remaining amounts in their accounts.

What you need to know: May impact those who planned to open an HSA in 2020, unless the Healthcare FSA balance is zero as of the last day of the plan year.

Also, there is no requirement to provide a supplemental Run-Off Period or additional period of time to submit claims incurred during the extended claims period. However, it would be reasonable to offer at least a brief supplemental Run-Off Period to allow for submission of claims incurred late in the extended claims period.  The amount available for carryover will be determined after all claims incurred during the supplemental run-off period have been submitted (by whatever deadline required under the plan) and adjudicated by the plan.

Example 1: An employer sponsors a Section 125 plan with a Healthcare FSA that has a 1/1-12/31  plan year and provides for a grace period ending on March 15 immediately following the end of each plan year. The employer may amend the plan to permit employees to apply unused amounts remaining in an employee’s Healthcare FSA as of March 15, 2020, to reimburse the employee for eligible medical care expenses incurred through December 31, 2020.

The Extended Claims Periods will also impact plans that have a Carryover.

Example with Extended Claims Period:

Assume a non-calendar year Healthcare FSA with a plan year ending June 30, 2020. The plan allows for carryover of up to $500 in unused amounts to the next plan year. The plan is amended to allow an employee with unused amounts remaining as of June 30, 2020 to be reimbursed from those amounts for eligible medical expenses incurred through December 31, 2020, including amounts in excess of $500 

Scenario 1: Most Unspent Funds Utilized. In this scenario, assume an employee has $2,000 in unspent funds as of June 30, 2020, and the employee incurs $1,900 in eligible medical expenses between July 1, 2020 and December 31, 2020. The Healthcare FSA may reimburse the employee $1,900 from the $2,000 remaining at the end of the 2019-2020 plan year. The $100 in unused amounts from the plan year ending June 30, 2020 may be carried over to the plan year beginning July 1, 2020 under the carryover rule and is available to be used for claims incurred through June 30, 2021.

Scenario 2: Carryover Limit Applies to Unspent Funds. As an alternative scenario, assume an employee has $1,250 in unspent funds as of June 30, 2020, and the employee incurs $600 in eligible medical expenses between July 1, 2020 and December 31, 2020. The Healthcare FSA may reimburse the employee $600 from the $1,250 remaining at the end of the plan year ending June 30, 2020, leaving $650 still unused. $500 of the remaining $650 in unused amounts may be carried over to the plan year beginning July 1, 2020 under the carryover rule and is available to be used for claims incurred through June 30, 2021. $150 will be forfeited.

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